Should the government tell banks what mortgage rates to charge?

There are two other threads on this topic. Please try to post in the appropriate thread.

• What can existing PTSB customers do about the 6.05% Standard Variable Rate?
• What is the SVR for existing customers?

In a normally functioning market, the government should let the market decide interest rates.

But the market is not functioning normally

• The government has already intervened in the banking market by taking ownership or and/or guaranteeing deposits and bonds.
• 50% of borrowers are vulnerable to exploitation as they are in negative equity or arrears and so cannot switch
• Due to the credit famine, even a borrower who is not in negative equity probably can't switch and so is vulnerable.
• The lenders have been told to reduce their loans to deposit ratios, so they are delighted to see borrowers leave and it seems that PTSB, in particular, have raised rates in an effort to encourage borrowers to switch.
• The Irish banks are finding it very difficult to attract deposits
• The Irish government owns three of the biggest lenders, PTSB, AIB and EBS
• The Irish banks are accessing a lot of funding through the ECB at 1.25%

So, although, in principle, the government should not be influencing mortgage rates, they do need to get involved to prevent predatory lending practices.

If there is a role for the government, they need to focus first on the banks which they own.

The Irish government owns three lenders:

I am not convinced that the government should get involved at all, but if they do get involved, they need to resolve the issue whereby some citizens are paying their government a mortgage rate twice the rate which other citizens are paying.

If it was right for the government to force AIB to reduce their rate to 3%, then it would be right for them to force PTSB to reduce their rate to 3% also.

The government should not tell Bank of Ireland that 4% is too high, while PTSB is charging 5.9%

The government has told Bank of Ireland and Ulster Bank that they should reduce their rates. But a government owned institution is charging 5.9% and they are under no pressure to reduce the rates.
This makes no sense at all. The government has no moral ground to make such a demand.

Mortgage lending has to be profitable to attract deposits
AIB is now charging 3% on its mortgages as it was told to do so by the government.
But they have also been told by the Central Bank to improve their loans to deposits ratio.
And the government wants them to lend more.

The minimum acceptable margin must be at least 1%. That means that the maximum AIB could pay its depositors would be 2% with a mortgage rate of 3%. It simply won't be able to attract deposits at this rate.
Of course, AIB has a lot of ECB funding at 1.25%, but the ECB wants to end this as quickly as possible. And a lot of the ECB funded money is allocated to trackers which are priced at less than 1% above ECB.


Mortgage rates have to be high enough to make it worth the bank's while giving out mortgages
There is no activity in the market because there is so little lending. If the government forces lenders to lend unprofitably, they will not make any new loans.

Government interference will destroy any chance we have of foreign banks entering the Irish market
The ideal thing for Ireland and the Irish mortgage market would be for a foreign institution to see that it was worth entering the Irish market for deposits and mortgages.

The purchase of the government's stake in Bank of Ireland by a foreign consortium was a huge boost for the international image of Ireland. It also saved the Irish taxpayer from having to invest a lot more money. How do these investors feel now, when their bank is being told to charge a lower mortgage rate than the Irish owned banks?

And, of course, we want the state owned banks to be profitable so we can sell them
The government should not be a long-term owner of three banks. The objective is to sell them off as quickly as possible. Telling AIB to set the mortgage rate at an unprofitable level will not help.

Potential foreign buyers would also be put off by any government regulation of market rates.

The government should not threaten the banks with legislation
The Troika will presumably insist that the Irish banks be put on a profitable footing.

The government should not bargain insolvency legislation for rate cuts

According to this article by Charlie Weston, the government may be trading some changes in the insolvency legislation in exchange for rate cuts.

Mr Kenny said he expressed the "disappointment" of the Government to the banks but didn't mention any threat to cut bankers' pay at the meeting.

"The Government has got to consider the personal insolvency bill as to whether you include mortgages in that personal insolvency bill," Mr Kenny said.

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The new insolvency legislation must include mortgage debt. The two issues are not connected and the government should not be linking them.

Absolutely agree with Brendan that focus on latest ECB cut and whether banks will reduce rates to reflect it, is a red herring. Banks have been raising standard variable rates independent of ECB changes for well over a year leaving PTSB with an eye-watering 5.9% cf Bank of Ireland on 4%.

But if I have a PTSB mortgage today and am paying 5.9% then if competition exists then I should be able to move my custom to Bank of Ireland. However chances are 1 in 10 that I am in some sort of default and I may be one of the 180-400,000 in negative equity, and even if not in negative equity I may need find an additional deposit if moving so as to get my loan to value to an acceptable level (70-92% as far as I can see). So moving my mortgage may not be at all practical which is a competition concern.

But PTSB is owned by the Irish state and like the pillars, depends on a daily Government guarantee to open its doors. So this is a State aid concern also - the Irish government is funding and supporting a bank through state aid including guarantees and yet competition in the market in which that bank operates is distorted.

On the bank's side they face increased cost of funds from the market and are trying to rebuild their balance sheets (higher interest = more profit = more capital) and that's what commercial enterprise should be doing.

Plainly though we need some refereeing of interest rates to take account of consumer and banks' needs. And unless that refereeing is enshrined in law it will tend to be ignored, particularly by the stronger components in the market. Either that or consumers need be able to move even if they have default or negative equity which will be a challenge but could the Govt legislate so that the original bank is exposed to the negative equity, or that all banks must accept transfer requests. Difficult, how do other countries prevent banks charging what they want on variable rate mortgages?

And throwing calumny now on certain banks for not passing on the latest ECB cut whilst others enjoy the fruit of previous increases independent of the ECB doesn't seem sensible.

NAMAwinelake said:

And throwing calumny now on certain banks for not passing on the latest ECB cut whilst others enjoy the fruit of previous increases independent of the ECB doesn't seem sensible.

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+ 1.

Ignoring legacy standard variable rates at PTSB and AIB as they are no longer available, a comparison of the non discounted variable rate on offer at the two banks for a homeowner with a loan to value of >80% is:

AIB : 3.24%
PTSB : 5.90%

Why have PTSB not been called up to explain this?

From experience, AIB's lending policy was/is a lot stricter than PTSB's so presumably there are a lot more people in arrears at PTSB than AIB yet these are the people who are being forced to pay a variable rate that is 2.66% higher than that available at another state owned bank.

As an aside AIB are now offering a variable rate of 2.84% for loan to values of less than 50% and we wonder why they are not lending? We can't expect the banks to be "open for business" if there is not enough margin to support the lending.

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Given that the government or Central Bank may have a role in the setting of mortgage rates, what should an appropriate standard variable rate be?

I asked a friend of mine in the UK for an insight into the UK market, and this is what he told me.

From what I gather, 90% mortgages are widely advertised, but the underwriting is harsh, and many applications are turned down or scaled back. Probably a good thing! Rates are typically 4% for a 3 year period, reverting to the lender's SVR. The catch is that SVR's are currently high at around 4.25%, and I believe these are not contractually linked to BBR. This means the lender can set its own lending margin, so borrowers have no certainty about future rate, either in terms of BBR, or SVR. In practice, I think most of the lending is being done at lower LTV's, mainly to people moving and with significant equity under their belts.

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So 4.25% is 3.75% above British base rate.

Add the same margin to the ECB would give a rate of 5%.

Brendan

"Raising mortgage rates just makes the arrears situation worse and so is bad for the lenders anyway".

I have heard this argued and it's just not correct for two reasons

Firstly, around 6% of mortgage holders are in arrears. It could be argued that pushing up the interest rate will make little difference to them as they can't pay it anyway and the bank can't collect it anyway. But the bank will get more money out of the remaining 94% who are not in arrears.

So it's clearly in the bank's interest to raise interest rates. I am not justifying raising interest rates, I am simply debunking the argument that the banks lose out by raising interest rates.



Secondly, the most significant of the many factors which affect the levels of arrears is the level of unemployment. In general, if people are in jobs, they can pay their mortgage. If they lose their job, after using up their savings, they can pay very little of their mortgage.

Other factors include

• the extent of negative equity
• the remaining term of the loan and whether it is interest only or not
• the level of take-home pay which is influenced by government tax rates
• the personal circumstances e.g. a couple splitting up, illness, etc

Raising mortgage rates will probably increase the levels of arrears, but not significantly.

Brendan Burgess said:

Firstly, around 6% of mortgage holders are in arrears....But the bank will get more money out of the remaining 94% who are not in arrears.

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Asking for more from people who can just barely pay their bills who may be already juggling their debts each month seems likely to push mortgages into arrears, not result in more money.
Its the same faulty logic that expects that putting up taxes automatically results in more revenue.
Beyond a certain point - it doesn't - its just a drag on economic activity.

In fact depending on how critical things become with the next budget, with stealth taxes, water charges, property taxes and the like, unregulated bank charges could be the final straw that puts huge swathes of people into debt.

And the banks excuse? - "we were told to become profitable as soon as we can"
Fine - find a way to do it without putting pressure on a broken sector of the market.
Provide mortgages so that the market can recover, not continue to spiral down for lack of demand.

Find other markets in which to trade.
Try to *do* something to earn your outrageous salaries!
Don't just sit there flicking the "interest" counter another point higher and call it "a days work" or a "strategy"!

Because its neither.

Its quite certain the PTSB needs to be called to account and the market investigated to expose the lack of competition overall and the restrictive effect of anti-competitive measures.

A "free market" it certainly isn't.

Asking for more from people who can just barely pay their bills who may be already juggling their debts each month seems likely to push mortgages into arrears, not result in more money.

Its the same faulty logic that expects that putting up taxes automatically results in more revenue.

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Hi Onq

You are making the same reasoning mistake as the others which is why I wrote this piece.

You are looking at the 6% and maybe double that who are in trouble. Putting up the rates will just make things worse for this, around 10%, and the bank probably won't get any more from them.

But the rate is increased for everyone, so the other 90% of mortgage customers will pay more so the bank is much better off.

Brendan

Hi Brendan,

You seem to be assuming that all the 90% can pay more - I don't believe that this is so.
I believe that a proportion of the 90% are very close to the edge, and any rise may tip them over.
Therefore I'm afraid you may not be talking about making matters worse for 10% and getting more from 90%.

You may be talking about

- making matters intolerable for 5%
- making matters worse for 5%
- putting an additional 10-20% into arrears
- getting a marginal increase from the remaining 70-80%

And losing revenue overall.

There don't seem to be hard figures to back either of us up.
There are the usual vague guesstimates by economists and financial gurus.
Thus there will be those in government who may risk taking a punt on NOT regulating rates.

And if I'm right, we will spiral into recession and we may see this government having a very short shelf life.

- making matters intolerable for 5%
- making matters worse for 5%
- putting an additional 10-20% into arrears
- getting a marginal increase from the remaining 70-80%

And losing revenue overall.

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Onq - that is too big a jump of reasoning.

It won't make any difference for a small group who will/should default on their mortgages anyway. The bank will charge a bit more and then write off a bit more, so it won't affect the bank.

It will put others into arrears who will eventually pay it anyway.

There will be only a very few cases where the banks lose money. These will be people who will give up as a result of the increase.

Brendan

Good article by John McManus in today's Business Opinion
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To all important outside eyes, it clearly looks as though the AIB board was forced into an about-turn by the Government which was feeling the heat as the banks acted in a fashion entirely consistent with the Government’s own banking policy. This policy’s central objective is to repair the banks’ balance sheets to a level where they can stand on their own and attract outside investors.


The paradox is that AIB probably had the best case for not passing on the rate cut, as it has been slow to pass on hikes. Bank of Ireland can also make a case for not passing on cuts because it is not the most expensive in the market, even after the other banks have cut.


Presumably at some point the Government will see the downside to ordering the banks around,

...
The Government’s response to this self-created and utterly predictable problem has been to try and have its cake and eat it, which all sounds very like the Fianna Fáil approach to economics.

It is unacceptable that one government controlled bank charges a standard variable rate of 3% and another government controlled bank charges a standard variable rate of 5.9%. If the Regulator cannot resolve this issue through his existing regulatory powers or the Government cannot resolve this situation through direct dialogue with the banks then unfortunately legislation is required.

I also find it unbelievable that the customers of PTSB who have these standard variable rate mortgages are not making their voices heard in relation to this very unfair situation.

Agree with you completely, concerned PTSB mortgage holders need to get the finger out and post here with the their rates and experiences.
Personnaly I have contacted my local TD to make representations along with links to posts here, contacted primetime with links to posts here and those new posts that have appeared in the last day or so.

Most of us coming off the 5 year fixed are now only encountering the issue and due to LTV and Neg equity we are stuck with this lender of last resort.PTSB have well over 40% of the mortgage market, no wonder arrears with mortgage holders are increasing, with the budget due, there won't be two pennys to rub together.
So come on, lets raise the profile of this issue and if it requires regulation then so be it. PTSB are acting like loan sharks, sub prime would be cheaper.

Brendan Burgess said:

Onq - that is too big a jump of reasoning.

It won't make any difference for a small group who will/should default on their mortgages anyway. The bank will charge a bit more and then write off a bit more, so it won't affect the bank.

It will put others into arrears who will eventually pay it anyway.

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I said I was engaging in speculation on the figures.
I have no hard figures to back up my comments.

Then again, I'm not sure you do either.
So in fact we may both be jumping.

There will be only a very few cases where the banks lose money. These will be people who will give up as a result of the increase.

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The possibility that the bank may lose money isn't bothering me as much as the plight of those who will "give up" as a result of the increase.
Given the amount of money that we have already put into the banks I think its appropriate that they should feel a little pain.
I don't think anyone else should be put through the wringer to make a small increase on their balance sheet.
Those two little words - "give up" - can mean a whole world of pain for a family.

Hi, I have posted this in another thread,but I think it should be here,so mods feel free to delete it from here or the other thread.

thedaras

I think the biggest issue for those who are with the PTSB is that they cant switch to another lender.(or only in very limited circumstances )
In any other time,when you had a mortgage and felt the rates were too high,you had the option to move..in other words competition for the lender.
However now ,the situation is that people cannot move and are therefore stuck with PTSB,and they in turn can charge what they like.

In other circumstances I would say fair enough,they can charge what they want,and people can choose to stay with them or not,but not now,the situation has changed and people are being forced to stay with them.
This is why I think the Government should intervene,if nothing else but to allow people to move banks,not reduce their debts but be free to move them to a bank who charges a lot less.

Imagine a case where you have you home land line with company A,and have signed a contract with them,with the knowledge that you can move if their rates go too high, and then they charge hundreds more per month,but no other provider will take you on,you need the phone,you have no choice but to stay with company A.

There is no incentive for them to charge less,as they know you cannot move,even though you believed you would have that option..

I honestly think the Regulator needs to look at this,and perhaps it could be found to be unfair,as at the time of taking out the contract people believed they could move..
Where will it stop,what if PTSB decide to charge 20%.
I dont think anyone in their right mind would sign up to any contract where they can NEVER get out of it.
Either way, I cant think of any other company that you MUST stay with,no matter what they charge..can any one else think of one?

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according to Jonathan McMahon of the Central Bank

Irish Central Bank regulation of the interest rates charged by lenders "would not be a good policy outcome", Jonathan McMahon, the bank's assistant director general for financial institutions, has said.


"We can think of lots of very good reasons why regulation of interest rates would not be a good policy outcome," said Mr McMahon said today. "Much better could be done through the process of supervisory interventions."

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Elderfield is right. A policy of a Central Bank interfering in a banks ability to reprice their loan book is completely wrong. He is also right that there are competition concerns about being people being stuck with one lender and not being able to shop around for the best deal but I am not sure how they are going to resolve this through either regulation or competition law.
As for different banks charging different rates, well no two banks are same. They don't have the same loan books, they don't have the same funding mix, they don't have the same funding costs, they don't have the same mix between mortgage types etc etc. There is no evidence to suggest that PTSB (as large as their rate may seem compared to the others) are engaged in profiteering. As taxpayers, we want profitable banks or at least banks that aren't making losses.

Elderfield's original position was wrong.

PTSB are clearly profiteering and will continue to do so as long as we allow them to.
Profit chasing is what has gotten us into this mess - so its past time to put a brake on the PTSB.
The myth of the self-regulating free market is broken and needs to be eviscerated and dealt with finally.
It is clear that without any regulation capitalists - without conscience or an awareness of society's well-being - will chase profits.

A policy of a Central Bank interfering in a banks ability to reprice their loan book is completely wrong

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The subject is their interest rate, not their loan book - please let's stay on topic, because this is not just an important discussion.
It is seminal to admitting what went wrong with the banks and the wider capitalist economy and essential that fair and balanced regulation is brought in.
Chasing profits is what distorted the banking system in the first place - moving it from an industry that lent prudently to one that inanely chased market share and share price.
The wages for that paradigm shift was a collapse in share price and bankrupt banks that should have all gone to the wall in a true capitalist society, but instead relied on a Welfare State Bailout.

Let us not pander to vested interests whinging because the people who bailed them out are unwilling to allow them run wild and profiteer a second time around, doing yet MORE structural damage to a faltering recovery.
Such people - and the PTSB management - need to be put in a room for a couple of years and the keys thrown away.
With their damaging policies put on ice until the economy makes some sort of attempt to rise, we may prosper.

onq said:

They are clearly profiteering and will continue to do so as long as we allow them to.

They myth of the self-regulating free market is broken and needs to be eviscerated and dealt with finally.

It is clear that without any regulation capitalists - without conscience or an awareness of society's well-being - will chase profits.

Profit chasing is what has gotten us into this mess - past time to put a brake on the PTSB.

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Show me the results that show they are 'clearly profiteering'. What is their interest margin according to their most recent results? They are currently offering roughly 3-5% on deposits.

The old

"Your lack of knowledge on other things negates your argument" riposte?

Sorry, but if other banks - more heavily debt can struggle along on lesser rates then PTSB operating at the same time in the same market can either follow suit or rearrange their internals to allow them to follow suit.

Anyone whose ever done a marketing degree will tell you that.

Citing their deposit rates is a non-argument.
(handbag out) You show me that they aren't profiteering!

I'm not interested in what they CLAIM they'll give to people with money.
I'm interested in what we KNOW they're taking from people some of whom are financially distressed.